The Blairmore Witch Project

It’s been a long week in politics, and one that David Cameron is no doubt hoping was all a horrendous cheese dream.

I believe it’s customary to summarise a topic for those who have been living under rocks before launching into further detail, so here is the TL;DR version: it has now come to light that David Cameron, Prime Minister of the United Kingdom, leader of the tory party, and defiler of pigs, did in fact have shares in an offshore investment vehicle of which his father (who seems to have also had shares) was one of the founders.

This is dodgy because offshore investment vehicles are often used as a way of evading (illegal) or avoiding (legal, but generally considered immoral) tax, and Cameron has not only repeatedly criticised such practices but has also presided over governments which have imposed austerity measures on the UK while a great deal of tax is potentially being lost to such evasion and avoidance.

Cameron initially tried to dodge the question by stating that it was a “private matter.” When this didn’t work, he issued “a series of statements … that now look crafted to avoid lying, but avoid telling us the whole situation,” as Newsnight presenter Evan Davis put it. This is a charitable way of saying that they were on the one hand factually accurate but on the other hand completely dishonest at the same time (in that they purposefully misled the public by notable omission). But even now that he has finally come clean (after 4 statements in the space of 48 hours) and tried to defend himself, there remain several lingering questions and/or holes in his story; I’m going to try to address some of them here.

Was the fund intended to avoid tax?

Cameron claims that the fund was not intended to facilitate tax avoidance or evasion. Rather, he claims that the purpose of setting up offshore was simple, commonplace, and entirely on the level. Here is his explanation:

It was set up after exchange controls so that people who wanted to invest in dollar denominated shares and companies could do so.

However, this explanation seems to be far from sufficient. Richard Brooks, appearing on Newsnight, questioned why exactly the fund would have to be in Panama in order to deal in dollar-denominated assets; as he pointed out, “they could have done that in London.” Moreover, Cameron’s shares were acquired in 1997, a full 15 years after the fund was set up, and nearly 2 decades after the exchange controls were lifted —even if we buy the idea that specialised offshore funds were required to invest in overseas assets in 1982, it is difficult to believe that Cameron Junior couldn’t easily invest in dollar-denominated assets through some other means by 1997 if that was what he really wanted to do.

There is also cause for scepticism about Cameron’s explanation when we look at the wider pattern of Cameron Senior’s offshore activity. Firstly, although Blairmore Holdings was technically located in Panama when the PM held shares in it, its directors all gave addresses in the Nassau, an island in the Bahamas generally considered to be a tax haven. Board meetings were held, at least most of the time, in Nassau or Switzerland (also a tax haven) — I’ll return to this point later. Cameron Senior and his fellow funddirectors also looked into migrating to destinations such as the Cayman Islands and Bermuda in 2008, before settling on Ireland in 2012. All three are generally considered tax havens.

These arrangements would look much more forgivable if the fund were truly international in character, but this is far from the case: it seems to have been managed in practice almost entirely by the 5 UK-based directors (who appear to be referred to as its ‘investment team’ in some of the company’s documents). Its prospectus has a ‘directory’ listing ‘legal advisers to the fund’ in the UK, Panama and the Bahamas, but no other countries (not even Switzerland, where some of its directors were based). The company’s investment manager is also based in the UK — unsurprisingly, if all of its investment was actually directed from the UK.

Nor is it just a question of the one fund. Cameron Senior was involved with multiple investment vehicles in different offshore jurisdictions: Panama, Geneva, and Jersey. Again, all of these are generally considered tax havens. He also seems to have left a significant estate in Jersey upon his death in 2010 — at least £10,000 but possibly running into the millions. Jersey, as well as being a tax haven for international companies and investment funds, has no inheritance tax — presumably this is pure coincidence.

Perhaps most damningly, an investor prospectus released by Blairmore Holdings itself gives us reason to doubt the notion that its offshore nature has nothing to do with tax regimes. The words ‘tax’, ‘taxation’ or ‘taxes’ appear over 120 times (across 27 pages of the 78-page document), whereas the words ‘dollar’ or ‘dollars’ appear 11 times (across 7 pages). One passage is particularly explicit, and can certainly be read so as to cast quite a critical light on Cameron’s narrative:

The Directors intend that the affairs of the Fund should be managed and conducted so that it does not become resident in the United Kingdom for United Kingdom taxation purposes.
Accordingly, … the Fund will not be subject to United Kingdom corporation tax or income tax on its profits. The Directors and the Investment Manager each intend that the respective affairs of the Fund and the Investment Manager are conducted so that [this is the case] insofar as this is within their respective control. However it cannot be guaranteed that the necessary conditions will at all times be satisfied.

You can read the passage in full and in context here.

Why else would it have been offshore?

Another possible, and quite plausible, explanation is that Panama was chosen not to avoid tax — although its founders certainly seem to be aware that this would be one of the effects — but to avoid regulation. Tax havens are often also jurisdictions with little or no financial regulation. It may well be that Blairmore Holdings was intending to take part in activities that would have been impossible or heavily penalised in the UK. Again, there are some signs within their own documents that this could have been a motivation. When they ‘migrated’ from Panama to Ireland in 2012, they noted that:

While most of the holdings and cash will transfer out to the new Irish fund, we will leave some funds behind — this will be less than 0.5% of the fund’s total assets. There will be some cash left to pay invoices and also a few companies which have not yet been sold and are not eligible [for regulatory reasons] in the new Irish fund.

While 0.5% is obviously a small amount, a few considerations should be borne in mind. Firstly, these were the assets held at the time of migration — it may well be that either the relevant regulation had been relaxed significantly over the previous 20 years, that the fund’s investment strategies had changed significantly, or that they had ditched the majority of these assets in anticipation of the transfer. Secondly, the assets were ineligible by Irish regulatory standards — many more may have been ineligible by UK standards. In other words, this passage represents a recognition that their investments were more laxly regulated in Panama than they would have been in Ireland, but the 0.5% figure should not necessarily be taken as an accurate guide to how significant or insignificant this was to the fund’s earlier asset base and investment activity, or to the reasons it was established offshore.

Similarly, the establishment of the fund in the first place involved a necessary circumvention of UK regulations. The law required the majority of board members to be resident outside the UK in order for the business to be able to run offshore, which was easily circumvented by appointing 6 puppets recruited from the Bahamas and Switzerland in order to outnumber the 5 UK-based directors. This seems to have been the reason for the board meetings all taking place in Nassau and Geneva, as mentioned earlier. This was technically legal, but it calls into question Cameron’s narrative: do we really believe that this was simply the easiest way to invest in overseas assets, and had nothing to do with avoiding any responsibilities or circumventing any barriers to profitability?

Were all taxes paid?

The PM gave a rather muddled answer when he was asked about how much tax had been paid, and of what kind — for instance, he referred to Blairmore as a “unit trust,” which has been disputed by other sources:

There’s a confusion there on behalf of the Prime Minister — it’s an investment fund. It’s not really a unit trust. You invest in a fund and your investment is represented in units, which has a price. But there is no real material difference between this an investment fund.

One thing he was clear on was that he has not personally avoided or evaded any UK tax on his investment in the fund :

I paid income tax on the dividends. There was a profit on it but it was less than the capital gains tax allowance so I didn’t pay capital gains tax.

However, he also made broader claims:

It [the fund itself] was subject to full UK taxation… It [ambiguous: either the fund itself or the profit he made on the shares] was subject to all the UK taxes in all the normal way.

This would seem to be (at least potentially) misleading. An investment fund based in the UK is subject to different tax rules depending on what kind of legal structure/status it has; also, the amount and type of tax payable by the fund would depend on the sources of its income. For instance, dividends from domestic companies may be taxed differently to dividends from foreign companies.

As a result, it is important to distinguish between the tax paid by the fund itself and the tax paid by individuals on any income they make as a result of their investment in the fund. In his interview with Robert Peston, Cameron was actually asked not about his tax arrangements, but the fund’s:

The effect of Blairmore’s structure meant the fund didn’t pay tax. Is that wrong?

Cameron explaining his own personal compliance with UK taxation is therefore a dodge of the question. It is roughly equivalent to a Google investor being asked about Google’s tax arrangements and responding “Well I pay income tax just like everybody else” — it may well be true, and even reassuring, but it isn’t actually an answer to the question asked and it doesn’t do anything to put minds at ease about the business’ tax compliance.

Peston himself notes this in an article he has written, which contains the following passage:

So any Cameron who received income or capital from Blairmore should have paid tax on it. That said, Blairmore’s offshore status does reduce — probably to zero — the tax liabilities of Blairmore itself.

And of course nobody is publicly suggesting that Blairmore Holdings evaded tax — that they did anything illegal. But Cameron failed to address the question of whether tax was avoided by the fund itself due to its being based in Panama. It could be that even if it had been based in the UK no tax liabilities would have arisen, due to factors like the nature of its investments and its legal structure. But this is far from obvious, and is something Cameron has judiciously steered clear of actually answering as far as I can see.

In other words, it would seem on the face of it that Blairmore Holdings quite possibly avoided UK tax despite its de facto board of directors, investment team, investment manager and seemingly primary source of legal advice being based in the UK (as well as an unknown, but presumably significant, number of its investors) — but we can’t know that without actually going over the books and working out whether they would in fact have had to pay tax at any point if they had been based in the UK.

Does it matter whether Blairmore avoided tax?

Some might think that as long as Cameron paid his personal share of tax, all is well and he is beyond reproach. However, the real question is whether he knowingly benefited from tax avoidance by other parties, such as the fund itself or his father, and did nothing about it.

To give an analogy: It’s one thing to say that you’ve never personally sold drugs, it’s quite another to say that you’ve never knowingly received any income from the drug trade — a money-launderer, for instance, might be able to honestly claim the former but not the latter. Cameron (and Blairmore’s other investors) may have benefited from inflated dividends as a result of the fund’s ability not to pay tax, and if this is the case then the arrangements could certainly be criticised (on moral, if not legal grounds).

Another question is whether Blairmore’s offshore status, and related tax arrangements, resulted in a net loss to the UK Treasury; the answer to this is far from obvious. Obviously if the fund itself would not have paid any tax in the UK anyway, then it is entirely likely there has been no loss (provided, of course, that the recipients of the dividends and capital gains have all properly declared them and met their tax obligations, etc).

Even if the fund would have paid some tax, though, it’s possible that the UK has not lost out overall: taxing the fund would reduce the dividends payable to investors, which would in turn reduce the tax paid on those dividends; there is somewhat of a trade-off between taxing the fund and taxing the investors. To calculate whether the UK was left worse off as a result of the arrangements, we would have to work out how much tax would have been paid by Blairmore, what effect this would have had on dividends, and how much tax would then have been paid on them by individuals.

The outcome of this would be affected by the relative levels of different types of taxation, on business profits, personal income and capital gains; it would also depend on where in the world investors were located. To give an extreme case, if none of the fund’s investors paid UK tax on their income, then any amount of tax paid by the fund would be a net benefit to the UK (but potentially a net loss to another jurisdiction). Again we are faced with various hypothetical scenarios, without enough information being public to really judge what would have happened in reality had the fund been based in the UK.

There are also arguments of broader principles. If the PM benefited from tax avoidance in any way, then it seems hypocritical of him to lecture others and make condemnatory statements; similarly, it would call into question the integrity of his proclaimed commitments to transparency, discouraging and clamping down on tax avoidance, etc. In short, it feels a bit like putting the fox in charge of the chicken coop.

Similarly, if the fund was intended to get around UK business or finance regulations, it could have been legal without being particularly ethical or responsible. These kinds of regulations perform a variety of functions: some protect investors, but arguably the most important and pertinent here are those which are designed primarily to prevent irresponsible or damaging financial behaviour.

In light of the global financial crisis that took place while Cameron still had money in the fund, the relevance and significance of paying heed to financial regulation should be obvious. However, it does seem unlikely that Blairmore’s behaviour particularly contributed to the financial crisis in any way, since they trade in corporate equities (shares in companies) rather than the financial ‘weapons of mass destruction’ like complex derivatives, structured debt securities, etc.

Is there more to come?

Cameron was forthright in his interview with Peston — perhaps more so than he intended to be:

I sold them all in 2010, because if I was going to become Prime Minister I didn’t want anyone to say ‘you have other agendas, vested interests.’ Samantha and I had a joint account…
So I am not pretending anything. But I was keen in 2010 to sell everything, shares, all the rest of it, so I can be very transparent. I don’t own any part of any company, any investment trust, anything like that.

In other words, Cameron knew that this would be an issue, and was keen to sweep it under the carpet before anyone noticed. But that’s not all:

We owned 5,000 units in Blairmore Investment Trust, which we sold in January 2010…

Cameron is admitting that he had holdings in an offshore investment vehicle while he was a sitting MP, and even as Leader of the Opposition, and that he disposed of them just before an election was due because he didn’t want to be stuck having to explain them to people as PM. He also clearly decided not to admit to them at the time, and was intending never to do so until his hand was forced by the leaking of the Panama Papers. Even when he father’s links became obvious, he initially tried to duck transparency with the “private matter” line and then misleading statements. This is particularly ironic given his proclaimed intention to “be very transparent.”

Cameron also comes too close for comfort to some honesty when he’s asked about the idea of rules requiring PMs to publish full details of their finances and tax arrangements. When Cameron declares himself in favour, Peston deftly points out that they would likely not kick in before he stood down. Cameron’s response is telling:

That is why I am very happy to get on and do that now. Whether we get on and do it every year, or starting now, or going back a couple of years, I am very happy with that.

As Peston points out, it is hardly surprising that someone ending his career as PM is not bothered by the notion of placing greater transparency requirements on PMs. And as Cameron says, “That is why I am very happy to get on and do that now,” just like he didn’t get on and do it during the last Parliament, when he was planning to serve another term, despite having declared his support for the idea.

This inclination to quietly dispose of his holdings when he fears scrutiny — and to dodge the same transparency he supposedly supports for others in his position — suggests that this may be the tip of the iceberg. This impression is reinforced by his refusal to guarantee that none of his inheritance is dirty money. First Cameron admits that his father had investments in the same investment vehicle as he did, and then that there was money in Jersey from another similar fund, and more generally:

I obviously can’t point to every source of every bit of the money, and dad isn’t around to ask the questions now.

One of the questions we might have asked Ian Cameron, if he were around now, is why his UK will was divided up the way it was. A £1m house was split between his daughters, whereas David Cameron was left £300,000. His first-born, Alexander, is an executor of the will (which implies there was no falling out), but was not gifted anything; this may be due to the fact that he seems to have acquired the £2.5m family home at some point before his father’s death (in other words, he may have already received the entirety of ‘his share’.

None of this is particularly sinister, except that Ian Cameron’s UK estate amounted to just £2.74m, out of a net worth estimated at £10m in the year before his death, and £300,000 is less than half the amount Cameron Senior made on the sale of two paintings in 2006. It is strange that a UK resident who apparently would have paid all of the relevant UK taxes on any wealth accumulated by his investments should coincidentally happen to have had the majority of said wealth offshore in a jurisdiction which imposes no inheritance tax at the end of his life.

Individually, any of these factors might be just eyebrow-raising and easily explained, but taken together it might be unreasonable to expect the public to believe that everything was above-board and honest. Who knows — a significant sum of money may be sitting in a secretive offshore account or trust waiting for the PM to take possession of it at some point in the future.

Suspicions like this — and indeed the suspicions mentioned earlier that Blairmore may have been intended to facilitate tax avoidance or to circumvent regulation — are hardly helped by the fact that Blairmore originally used opaque ‘bearer shares’, which technically belong to whoever happens to physically hold them, and are therefore practically impossible to trace — although in the case of Blairmore, it seems that the shares were actually held in a bank on behalf of the various unnamed ‘owners’.

These were later replaced with conventional shares, but that they were ever used raises questions about the thinking behind the fund’s establishment, as well as the tax arrangements of at least some of its investors; they also establish a willingness and ability to obfuscate paper trails with opaque financial structures, which lends credence to the idea that there may be more than meets the eye to Cameron Senior’s estates. It also reignites the tax avoidance argument — bearer shares avoided stamp duty when shares transferred ownership.

What does this all mean for Cameron, and for the rest of us?

It’s hard to imagine that this won’t seriously damage Cameron — it certainly doesn’t look good for him. Twitter has seen #resigncameron trending (and Tom Watson, following his attacks on Cameron in the media), and Facebook has an event page for a protest at Downing Street which has seen thousands express interest so far. The Panama Papers look set to remain an enduring story due to the sheer wealth of material, and every new story will ensure attention remains fixed on Cameron — even those stories not directly about him.

Considering that Cameron has already stated that he intends to stand down during this Parliament, and that his successor will need time to find their feet, this could very easily force a resignation. The Icelandic PM has gone as a result of his offshore links, and it isn’t difficult to imagine a coup being planned as I type this. Those who know the inner constellations of the tory party will presumably know whether there is a leadership candidate who has the right combination of low loyalty to Cameron and sufficient (possibly backbench) support.

Even if Cameron remains on for months or even a year or two, it is hard to imagine him recovering fully from this (especially coming as it does after the pig’s head incident, the budget disaster and IDS’s accompanying resignation). He would most likely be somewhat of a ‘lame duck,’ and it would be difficult for him to maintain his major edge over Corbyn — the ability to command a certain kind of respect, and to be taken seriously in a way that the new Labour leader often isn’t. The erosion of this selling point started with the pig’s head, but it still has a way to go. So all of this is, in some ways, encouraging — the scale of tory attacks may be reduced in coming months or years.

However, it may also mean that the tories take more care to prepare the way for the next leader; the earlier Cameron resigns, the more chance there is of the tories getting their act together in support of a new leader, and being able to detoxify their brand a bit (provided that they keep to the fixed-term Parliament timetable rather than seeking a mandate to replace him).

Either way, it feels like there’s a lot more mileage in this story. Even a week is a long time in politics.